A.I.M. Users Bulletin Board

[ls7550]

When you do a Vealie and increase Portfolio Control, does this mean that when a downdraft starts the buying will be delayed?

Yes. To keep the next buy/sell prices more aligned a Vealie would need to increase PC by the value of shares indicate to be traded, not half the share value.

It seems to me that if you compare the various parts of the normal business cycle for a given sector, B&H is better in the up cycle and much worse in the down cycle, whereas AIM does okay in an up cycle and gang busters in a down cycle in that it holds losses to a minimum and regains losses faster than B&H. This is what I get from Lichello's book(s) and observation. Is this correct?

No - but subjective. Consider for instance instead of investing $10,000 in a stock and buy-and-hold, you also decided to allocate an additional $2,500 extra cash that you might buy more stock with if the price declined. You might also be content to sell a little of the stock into cash should the price rise. Instead of a constant $10K initial start date worth of stock you might see fluctuations between $8K and $12K, but broadly averaging $10K. i.e. an element of buy and hold combined with some trading. That's along the lines of what AIM does. Into declines you buy some more, and might relatively quickly be at 100% all-in and endure the same losses as buy and hold thereafter. In rising markets you sell some, so don't fully partake in all of the upside. i.e. for very big downs AIM's losses can compare to buy and hold - excepting the smaller losses by not being all in for the earlier part of the decline. For big up's AIM isn't as rewarding as buy and hold. Those 'costs' however have a counter case of where AIM can generate gains when buy and hold gains are flat/zero, due to AIM trading activity (adding when low, reducing when high).

Whilst it might seem that stock prices generally rise over time, in practice they're actually quite flat for a lot of the time, interspaced by periodic revaluations either up or down. i.e. most charts show nominal not real (inflation adjusted) gains. This chart is for UK stocks that shows just the inflation adjusted share price value, and the associated income (dividend) inflation adjusted value.



You AIM the share price, not the total gain, and broadly share prices pace inflation, but in a volatile manner. Buy and hold just rides the roller-coaster up and down without making any changes, whilst AIM potentially captures some gains via trading the ups and downs.

Some investors might focus purely on price appreciation. Other investor might focus purely on income. Yet other investors might purely trade volatility (such as Options traders). Broadly no one of those is consistently the best choice, they're all much the same overall. Buy and hold exposes you to price appreciation and income (dividends) gains/loses. AIM exposes you to all three (price appreciation, income, volatility gains/losses).

In effect what AIM gives up on the upside, that should be countered by volatility (trading) gains. But in a very broad/general sense. If generally the rewards are no different then why AIM? Because much of investing depends upon the choice of start and end dates. Buy in at a trough sell at a peak and you'll likely have great gains. Buy at peak, sell at a trough and rewards can be bad. Cost averaging helps reduce the risk of being the worst case (but equally reduces the chance of being the best case). More often however 'average' is a good result - and AIM helps ensure that you tend to achieve that 'average'. What you tend to see however is that AIM is a bit above average in its choice of timing trades, such that over multiple cycles it often churns out above average rewards as a consequence of such good trading activity.